Residential property as a wealth planning vehicle

Direct property investing is hugely popular in the UK, Whether people buying a home to live in, or as part of a Buy-to-Let portfolio. The average house price in England and Wales has risen by over 300% since 1996.There is £1 trillion housing equity held by the over 65s however, recent changes to taxes, notably increased stamp duty as well as more stringent taxation on property income for Buy-To-Let investments made such investments less attractive for some investors.
These changes, coupled with other trends such as online investing, and the emergence of crowdfunding and peer-to-peer lending, has led to a flurry of new players in the market offering “Alternative options to invest in residential property”. While direct property investment is a market most advisers don’t get involved with, there are a lot of new opportunities for investors. Shouldn’t you be helping your clients navigate through this new landscape. Equity Release as a brand has a poor historical reputation due to the way it has been sold and who it has been sold to. But given a lot of wealth is locked up in residential property, how can adviser help clients assess Equity Release as an option for cash flow and financial planning ? What will Brexit mean for UK residential property?

Headlines:

Residential property could be one of the more exciting asset classes explored by advisers. There are 2 sides to look at residential property:

a)An investment vehicle – somewhere they can put their savings to work;

b) An income stream – either through re-mortgaging, equity release or indeed rental payments in the buy to let market.

The current size of the residential market is around £800bn in the commercial sector with £1.1tn in the residential sector – this does not include outright owned property which is estimated to be worth around £6tn.

There are of course challenges ahead for property funds especially in light of Brexit. In this respect, it should be noted that analysis of property movements is almost always done in light of both house price as well as centring on a focus on Central London.

Returns have so far been stable between 6-8 per cent. Broadly speaking residential property is a sustainable and suitable asset class because it is relatively resilient – especially in comparison to traditional UK equity investments.

Key issues and challenges:

Hearthstone believe that an influx of institutional investors into the private residential rent market in the UK should increase the quality of homes for rent. Primarily this is a function of the fact that in the main, the returns one would expect on their investment in a buy to let property tend to be poor in relation to both the initial capital invested, and capital needed to maintain properties. This is a problem particularly pertinent to the south east.

Primarily the residential market is more liquid. On average it takes 12 weeks to sell a residential property, significantly less time than a commercial property transaction. Whilst funds tend to hold cash for the purposes of redemptions, the nature of the market means that it is unlikely that they would have to do so – in the case of Hearthstone they have taken a decision to not use their ability to borrow to facilitate redemptions.

Conclusions and solutions:

Having institutional landlords, Hearthstone argue, will remove this problem. Primarily this is a function of reputational risk. An individual runs little to no reputational risk in renting out a property which is of a poor standard, should the tenant choose to move, it is unlikely that their reasons for moving would be communicated to any perspective new tenant. This is clearly not the case for institutional owners.

There was broad consensus across the room that whilst investing in retail property through a fund appeared to make more sense both from fiscal as well as time perspectives, it did remove the emotional investment that a number of clients would be attached to. However, practically, this was a reflection both of the way in which individuals invest their money as well as the way in which technology has developed.

Owen James Group

Owen James seeks to provide a platform for strategic engagement: an opportunity for key individuals to discuss and understand the business and investment issues which are affecting the whole of their industry. The end game being to enable firms to do better business - commercially, intelligently and ethically.